BMAN 21020: Financial
Reporting and Accountability
Revision Advice and Preparation for
Assessment : May 2022
huw.morgan@manchester.ac.uk
Ground Rules on Questions relating to the Exam
▪ Assessment guidance provided in this Lecture
▪ To ensure the same information is available all, no
additional information will be provided by either your
workshop leader or lecturer on an individual basis
▪ Emails cannot be answered on individual questions
relating to the assessment…..nor can we have
individual conversations with you….
…… Please: use Blackboard discussion forum for Q’s
Revision Strategy
▪ You should focus revision across the topics covered in
semester 2 and NOT on a small number of topics.
▪ The exam will comprise MCQ and written section to
allow for a full coverage of the syllabus
▪ Assessment will cover a range of Semester 2 topics, so
you need a broad understanding of the subject to do well
Approach to Revision
Sources of Revision in Order of importance
– Revision Activities
– Workshops
– Exercises set in lectures
– Homework Activities & review questions
– Core text book chapters covering lecture topics
– Wider financial press
– Academic papers
Remember this is a
very dynamic
subject. Financial
press contains
many of the issues
we discussed in
lectures. Use these
examples to
enlighten your
answers.
May 2022 Assessment
▪ 50% of your course grade (other 50% = Semester 1)
▪ Format is same as for semester 1, but with only ONE
compulsory question for the open-book section:
Semester 2 assessment:
▪ MCQ Section (1 hour, 60 marks: 1 minute per mark)
10 Questions, ranging between 2 and 8 marks 40%
▪ Open-Book EXAM (1½ hour, 60 marks: 1½ mins per mark)
Q1 (compulsory): 5 sections. Essay-style question on
interpretation, with other aspects [1,500 words] 60%
Assessment Areas from Semester 2
Interpretation
▪ Basic ratios & extensions; Trend & multivariate analysis; recasting for comparability
▪ Revise WSP 2 (Positive Accounting Theory)
Equity & Liabilities:
▪ Capital Maintenance
& Distributable Profits
▪ Capital Reconstruction
▪ Financial Instruments
▪ Company Tax
▪ Employee Benefits
Normative Theories:
▪ Changing prices
Positive Accounting Theory:
▪ How A/c-based agreements with lenders & managers can
incentivise manipulation (Thomas Cook in Workshop):
▪ E.g., debt covenants and financial instruments
▪ E.g., executive pay related to reported profit
Corporate Governance and Audit
▪ Role of: Board of Directors and external auditor
MCQ section
▪ For the first section you will have 10 MCQ questions.
Areas that may be covered include:
Equity & Liabilities:
▪ Capital Maintenance
& Distributable Profits
▪ Capital Reconstruction
▪ Financial Instruments
▪ Company Tax
▪ Employee Benefits
(pensions)
Normative Theories:
▪ Changing prices
Corporate Governance and Audit
▪ Role of:
o Board of Directors
o External auditor
MCQ section
Capital Maintenance & Distributable Profits: Topic 1 Sem 2: Lecture 1, WSP 1
▪ Financial capital maintenance [Historic Cost Accounting
– Perspective taken in historical cost accounting
▪ Purchasing power maintenance [Current Purchasing Power]
– HC adjusted for changes the purchasing power (inflation)
▪ Physical operating capital maintenance [Current Cost Accounting]
– Revaluing transactions to current costs to maintain funds for the
same level of operations
Normative Accounting Theory: Accounting for changes in prices
Text [p. 64]
Capital of £10, buys one unit of X (RPI: 100). Year 1: sells
X at year end (RPI: 140, replacement cost: £15) for £20.
Income statement
Financial Capital
Maintenance
(Nominal: HC)
Financial Capital
Maintenance
(Purchasing Power)
Physical
Capital
Maintenance
Sales 20 20 20
Cost/replacement
Profit (all paid as dividends)
(10)
10
(14)
6
(15)
5
“Retained” (relative to HC) - 4 5
Opening Capital: 10 10 10
Closing Capital: 10 14 15
All reported profit
is paid as dividends
Cash (after dividends paid) 10 14 15
SOFP
Capital Maintenance
Capital Maintenance & Distributable Profits: Topic 1 Sem 2: Lecture 1, WSP 1
Go through the workshop activities to remind you of the alternative
accounting treatments that were proposed.
Revision Area in Blackboard: Revision Qs answers after quiz answered
o Two types of MCQ possible:
o What profit is distributable whilst maintaining HCA / CPP / CCA
o Holding gains (inventory held), or loss (holding cash under CPP)
o More detailed revision activity also provided (which goes beyond
the level of exam, so is optional: not required for revision)
Normative Accounting Theory: Accounting for changes in prices
Capital Reconstruction
Key areas to revise include:
▪ Can you explain why creditors may be willing to agree to a
reduction in share capital and a restructuring of the business
that owes them money?
▪ Can you account for a capital reconstruction and
reorganisation? This will require knowledge of double entry
and the ability to use a Capital Reorganisation account as a
“stepping stone” to complete the full list of adjustments.
▪ We went through an example in the relevant workshop
Capital Reconstruction: Here’s a REVISION Q for you:
£'000 £'000
Non-current Assets (PPE) 170
Current Assets (no cash) 220
Current Liabilities
Trade Payables (220)
Bank Overdraft (50)
(270)
Net Current Liabilities (50)
Total Assets less liabilities 120
Capital and Reserves
150,000 Pref shares (£1) 200
100,000 Ord shares (£1) 100
Retained Earnings (180)
120
The following capital restructuring scheme is approved
and authorised:
i. 50,000 of the ordinary shares are to be
surrendered.
ii. The preference shares are to be surrendered and
cancelled and the holder of every 50 pref shares
pays Beta £30 cash, and gets issued :
o One 7% loan note of £50 each, and
o 20 fully paid ord. shares of £1 (redistributing
shares from [i])
iii. The freehold property to be revalued upwards by
£80,000
iv. The negative balance on retained earnings to be
written off, with any remaining balance on the
Capital reduction and reorganisation (CR&R) used to
write down equipment.
FULL Q with Test for you will be in BBD’s Revision [Sem 2] ANS available once you complete test
Capital Reconstruction
Other aspects:
What are the
challenges in
raising finance for a
company with this
SOFP?
How would the
company manage
to persuade
stakeholders to:
o Accept the
restructuring
o Be willing to
provide more
cash
Capital Reconstruction
Revision Area also includes
Quiz based on another Capital Reduction and Reorganisation
(CR&R) question, so you can see how MCQs may be raised – e.g.:
o What is the remaining balance on the CR&R account (to use to
write down an asset)
o What are the impacts on CR&R relating to some of the
proposed adjustments (e.g. steps 1 and 3 in previous slide)
Two Further Activities included in revision section.
Company Tax
Company Tax
▪ Revision [Sem 2] contains short test on accounting entries relating to tax.
Most companies have a corporation tax account and a deferred tax account;
consider their impact on the income statement. An over- or under-provision
from previous years, means income statement tax charge differs from the
closing Tax liability. Similarly, accelerated capital allowances (or other timing
differences) will also impact upon the tax charge in the year.
▪ Ensure you focus on the concepts of deferred tax: how they arise and why
we account for them as we do:
o Deferred Tax Liability
o Deferred Tax Asset
when is each recognised and why,
and how is each calculated?
Company Tax
Company Tax
Revision Area on Blackboard:
Focus on the concepts of deferred tax: how they arise and why we account
for them as we do, particularly a Deferred Tax Liability: when is this
recognised and why, and how is each calculated?
MCQ-style Questions can provide you with a description of how a
company’s asset is depreciated, compared to its tax allowance, and then
ask you to calculate:
▪ The closing deferred tax liability
▪ The deferred tax charge/(credit) shown in the income statement
(comparing the opening and closing DT liabilities)
Employee Benefits: Pensions
Pension: Lecture 4; Workshop 3
▪ The lecture explained 2 key treatments of accounting for pensions:
1. Discounting and lump sum (projected benefit obligation)
2. Accounting entries required for a defined benefit scheme
▪ Use the further examples from workshop 3.
▪ A revision section covers both perspectives. In a defined benefit
scheme, the actuary makes a lot of judgement calls (can you describe
the assumptions they have to make?) and changes in these estimate
can result in large gains and losses in OCI – as we saw in the case of
Tesco.
Employee Benefits: Pensions
Pension: Lecture 4; Workshop 3
Revision areas for MCQs include:
o Revision activity 1: The projected benefit obligation
method. The cost of promising to pay a set amount at
a future date, and the interest attached to the
obligation as it “unwinds” closer to the payment date.
o Revision activity 2: Defined benefit journals.
Presenting the corrections (journals) for changes in
the plan assets and pension obligations for the year,
including the accounting for actuarial gains/losses.
FULL Q
with Test
for you will
be in BBD’s
Revision
[Sem 2].
Full ANS
available
once you
complete
test!
Employee Benefits: Pensions
Pension: Lecture 4; Workshop 3
Q1: Assume the date now is 1 January 2020, and a lump sum benefit has been agreed with an
employee, payable on termination of their service which is assumed to be 31 December 2022 (in 3
years' time). The benefit amounts to £800 for each year of service. The applicable discount rate is 10%.
Required: Show how this will be accounted for each year until payment on 31 December 2022.
Q2: As at 31 March 2019, actuaries valued the company’s pension scheme and estimated that the
scheme had assets of £25m and obligations of £32m (using the valuation methods prescribed in IAS
19). The actuaries made assumptions in their valuation that the plan assets would grow by 4% (their
expected return) over the coming year to 31 March 2020, and that the obligations were discounted
using an appropriate corporate bond rate of 10%. During the year, the current service cost for current
employees is £1.7m, £3.1m was paid as pensions to retired employees, and the company contributed
£2.1m into the scheme.
At 31 March 2020, the actuaries revalued the pension fund and estimated the assets to be worth
£23m, and the obligations of the fund to be £35m. Assume that contributions and benefits are paid on
the last day of each year.
Required: Show how the pension plan assets and liabilities are adjusted for each transaction, and
then calculate the actuarial loss on the plan assets, and actuarial loss on the pension obligations to
be accounted for in the statement of comprehensive income for the year ended 31 December 2020.
FULL Q
with Test
for you will
be in BBD’s
Revision
[Sem 2].
Full ANS
available
once you
complete
test!
Financial Instruments
Pension: Lecture 2; Workshop 3
Revision areas for MCQs include:
o Calculate equity component of a convertible bond. A convertible
bond has elements of both debt equity. You should know how to
work out the debt element based on “vanilla” equivalent.
o Calculate the interest based on amortised cost, for a deep-
discounted bond. Based on an implicit interest (or internal rate of
return).
Financial Instruments
Pension: Lecture 2; Workshop 3
▪ Quick Revision MCQs:
– Deep Discounted bonds: at different dates (interest and “unwinding”)
– Convertible bonds: equity element, debt element (unwinding)
▪ Further examples and quizzes on:
– Discounted bonds
– Convertible bonds
– Equity v Debt (dividends v interest)
Open Book Q1 [60% of Sem 2 exam]
Interpretation (ESSAY for 60%):
▪ Basic ratios and extension; interpretation
▪ Correction of error in draft financial statements
▪ Revise WSP 2 (Positive Accounting Theory)
Expect to be provided ratios:
▪ Gross profit margin
▪ Net profit margin (after tax)
▪ Asset Turnover (net, NCA)
▪ Return on capital employed
▪ Current ratio
▪ Receivables & Payables days
▪ Inventory turnover (days)
▪ Gearing ratio
▪ Interest Cover
ONE company in period of change
▪ 2 years of FS (IS and SOFP) for one company.
▪ Ratios WILL be provided (see right)
▪ Scenario may include errors in draft financial
statements, which need correcting – and impact some
ratios. Be prepared to explain why correction needed
▪ Likely to be required from the perspective of a given
stakeholder (e.g., owner, potential investor, lender).
▪ Q likely to include Positive Accounting Theory….
To complete in 1½ hours.
Word limit: 1,500
Q1 [60% of Sem 2 exam]
Interpretation (ESSAY for 60%):
▪ Basic ratios and extension; interpretation
▪ Correction of error in draft financial statements
▪ Revise WSP 2 (Positive Accounting Theory)
To complete in 1½ hours.
Word limit: 1,500
▪ This exam will NOT require you to calculate a load of ratios, but WILL
require you to be able to interpret them, and some ratios may need to
be revised (given an accounting error – see next slides).
▪ Go through the revision section on interpretation: some great advice
from ACCA and two practice questions (with answers)
▪ Review George’s lectures on ratios and his lecture recordings
▪ Review past paper questions on interpretation to get a feel for the types
of areas covered. Final workshop also covers this aspect.
Q1 [60% of Sem 2 exam]
Interpretation (ESSAY for 60%):
▪ Basic ratios and extension; interpretation
▪ Correction of error in draft financial statements
▪ Revise WSP 2 (Positive Accounting Theory)
To complete in 1½ hours.
Word limit: 1,500
▪ The exam Q5 from 2018 (which is covered in your final workshop this week)
is a useful question to practice : the past paper is available, alongside
feedback to the cohort that sat the exam. This was the basis for your final
workshop and included the need to adjust ratios for some exceptional items
▪ Please note the word count restriction for Q1 is 1,500 words so be careful to
ensure you don’t go over: take some time to plan your answer and include
the most relevant and important aspects you think should be provided, based
on the scenario. On the other hand…. Don’t waste your word count!
Q1 [60% of Sem 2 exam]
Interpretation (ESSAY for 60%):
▪ Basic ratios and extension; interpretation
▪ Correction of error in draft financial statements
▪ Revise WSP 2 (Positive Accounting Theory)
To complete in 1½ hours.
Word limit: 1,500
▪ In TOMORROW’S ONLINE LECTURE (FRIDAY 6
MAY) I shall run though an approach to
answering the exam Q for Sem 2 2020
▪You can get hold of it from the FEEDBACK Sem 2
(where there is also feedback)
Q1 [60% of Sem 2 exam]
Interpretation (ESSAY for 60%):
▪ Basic ratios and extension; interpretation
▪ Correction of error in draft financial statements
▪ Revise WSP 2 (Positive Accounting Theory)
To complete in 1½ hours.
Word limit: 1,500
▪ Financial statements may be presented in draft format with some accounting treatment that
requires review, explanation, and possible correction. This was examined in past papers (e.g.
May 2019: Q1b showed incorrect treatment of financial instruments and asked for the
correcting journal and impact on key ratios).
▪ The issue of a financial instrument raises a number of possible treatments – for example:
o Redeemable preference shares paying a set return are debt rather than equity
o Convertible debt (convertible to shares at the redemption date, at the holders’ choice) are
treated as a hybrid of debt and equity
o The issue of debt at a deep discount means the coupon repayment is not representative of
the interest cost (using the implicit interest rate)
Refer back to the FINANCIAL INSTRUMENTS lecture, WSP and revision sections to revise each.
Q1 [60% of Sem 2 exam]
Interpretation (ESSAY for 60%):
▪ Basic ratios and extension; interpretation
▪ Correction of error in draft financial statements
▪ Revise WSP 2 (Positive Accounting Theory)
To complete in 1½ hours.
Word limit: 1,500
▪ Part of an interpretation question can incorporate aspects of Positive Accounting Theory
(PAT) to explain a possible motivation for the choice of an accounting treatment, or indeed
error in treatment. In May 2019 Q1d, for example, this related to the debt covenant
hypothesis. Be prepared to explain any of the three PAT aspects that were covered in
George’s lecture and in Workshop 6 (and how they may relate to a given scenario):
o Debt covenant hypothesis (e.g. Q1d from 2019)
o Bonus plan hypothesis (e.g. Q1c/d from 2020)
o Political hypothesis
▪ Review Workshop on PAT to revise how Thomas Cook’s accounting choices may have been
influenced according to Positive Accounting Theory
Assessment Areas from Semester 2
Interpretation (ESSAY for 60%):
▪ Basic ratios & extensions; Trend & multivariate analysis; recasting for comparability
▪ Revise WSP 2 (Positive Accounting Theory)
Equity & Liabilities:
▪ Capital Maintenance
& Distributable Profits
▪ Capital Reconstruction
▪ Financial Instruments
▪ Company Tax
▪ Employee Benefits
Normative Theories:
▪ Changing prices
Positive Accounting Theory:
▪ How A/c-based agreements with lenders & managers can
incentivise manipulation (Thomas Cook in Workshop):
▪ E.g., debt covenants and financial instruments
▪ E.g., executive pay related to reported profit
Corporate Governance and Audit
▪ Role of: Board of Directors and external auditor
Tomorrow’s lecture is ONLINE, using the Lecture
Zoom link (on Blackboard menu bar). Have a look
through the 2020 exam question before, if you can.
Thank You for your patience with dual delivery!
I hope you enjoyed the course. Please don’t forget to
complete the course evaluation when it becomes available.
Any Questions ….Please post them on the
DISCUSSION BOARD!